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“Next year, Californians may be in for a taxing time. In 2013, Californians will face two potentially devastating sets of tax increases; the first is an economy-busting $500 billion federal tax increase that will affect every U.S. taxpayer. In addition, Californians may also see a seven-year $47 billion state tax increase.
The threat of higher taxes comes at a time when family income has fallen by 7.7 percent between 2007 and 2010 and median net worth has fallen 38.9% from 2007-2010 – due in large part to the collapse of housing prices. The 2010 median net worth figures were “close to levels not seen since the 1992 survey,” according to the Fed.”
The worse news is if the Munger tax increase goes into affect, instead of the Brown effort, your increase will not be $47 billion in seven years, it will be $120 billion over twelve years. Can you afford it?
By the time the Obama and Brown/Munger tax increases go into affect, along with the $1.76 trillion ObamaCare taxes, the nation will be deep in Recession. Pass the Munger or Brown taxes, add ObamaCare and the $500 billion in new taxes, January 1, 2013 will see us in a Depression, with massive job cuts.
That is the good news.
There is no such thing as a good tax.
- Winston Churchill
Senate Republican Caucus, 7/5/12
Tax Increases for All in 2013?
Next year, Californians may be in for a taxing time. In 2013, Californians will face two potentially devastating sets of tax increases; the first is an economy-busting $500 billion federal tax increase that will affect every U.S. taxpayer. In addition, Californians may also see a seven-year $47 billion state tax increase.
The threat of higher taxes comes at a time when family income has fallen by 7.7 percent between 2007 and 2010 and median net worth has fallen 38.9% from 2007-2010 – due in large part to the collapse of housing prices. The 2010 median net worth figures were “close to levels not seen since the 1992 survey,” according to the Fed.
Below is a brief summary of potential federal and state taxes.
Federal Tax Increases
Beginning in January 2013, the largest single year tax increase in U.S. history – approximately $500 billion – is scheduled to take effect. While most of the tax increases are due to the expiration of long-term tax policies, such as the Bush tax cuts, and short-term economy stimulating tax cuts, like the temporary Social Security Payroll Tax Reduction and the Alternative Minimum Tax (AMT) “fix” also included in this calculation is the imposition of a new set of taxes that are part of President Obama’s Patient Protection and Affordable Care Act, (known affectionately as Obamacare).
There is still time for Congress and the President to take steps to stop the ticking taxbomb from exploding, however, it is not clear whether or how this problem will be resolved is not clear.
- Bush Tax Cuts: $166 billion
- Payroll Tax Cuts: $124 billion
- Alternative Minimum Tax Patch: $118 Billion
- Tax Extenders: $20 Billion
- 2009 Stimulus Tax Cuts: $20 Billion
- Death Tax Increase: $13 Billion
- 100 Percent Business Expensing: $7 Billion
Specifically, the tax provisions set to expire at the end of the year include: 
- Marginal tax rates rises from 25% | 28% | 33% | 35% to 28% | 31% | 36% | and 39.6% respectively.
- Top 15% rate on long-term capital gains rises to 20%.
- Dividends will again be taxed at ordinary income tax rates – 39.6% for top earners.
- Limits on Itemized Deductions and the Personal Exemptions Phase out will add an additional 1.2% to the top rate.
- Death tax rate increases from 35% to 55%, with the exemption falling to $1 million from $5 million.
- Child care deduction limit of $3,000 reverts to $2,400
- Child credit decreases from $1,000 per child to $500 per child
- Low 10% tax bracket for low income Americans expires and taxable income previously subject to the 10% rate will be taxed at 15%
- The marriage penalty equalization ends – the deduction decreases from 200% of the deduction for singles to 167%; and the 15% tax bracket reflects the reduced levels.
- Reduction of the earned income tax credit and refunds
- American Opportunity college education credit expires
- Refundable adoption credit and a lower deduction
- Deduction for student loan interest ends
- Education IRA limit drops from $2,000 to $500
Other tax policies that will expire include the Temporary Payroll Tax Cut Continuation Act of 2011, which temporarily extended the reduced social security tax withholding rate of 4.2% (down from 6.2%) of wages paid, is set to expire in February 2012.
And, the elimination of “tax extenders” – temporary tax breaks such as exclusion of mortgage debt forgiveness, the biofuel credit and 9 others – are set to expire at the end of 2012.
In addition to the expiration of these tax provisions, several new taxes that are part of Obamacare totaling approximately $22.8 billion are scheduled to begin in 2013. These taxes include:
- Expands the Medicare tax for incomes over $200,000 ($250,000 for joint filers) and applies the new 3.8% tax to investment income.
- Places a 2.3% excise tax on manufacturers of medical devices
- Medical Deductions are reduced by increasing the floor on medical deductions from 7.5% to 10% of adjusted gross income.
- Limits to flexible spending arrangements
- Eliminates deduction for expenses that can be allocated to Medicare Part D
The cost of these tax increases to U.S. taxpayers will be significant. According to an analysis conducted by the Heritage Foundation, the average U.S. taxpayer will see an annual tax increase between $1,929 for residents in West Virginia to $5,161 for taxpayers in Connecticut.  In California, tax filers with an adjusted gross income of approximately $71,000 will see a tax increase of approximately $3,525 per year without a proportional increase in income.
Moreover, lower income families will also be hit hard by the expiration of tax policies such as the lower 10% tax bracket, the reduced earned income tax credit and the reduction of the child credit. These families may, on average expect to see a tax increase of $1,200 per year.
California Tax Increases:
In addition to the looming federal tax increases, the centerpiece of Governor Jerry Brown’s budget proposal is a seven-year $47 billion “temporary” tax increase. These new taxes are embodied in the Schools and Local Public Safety Protection Act of 2012 ballot initiative that requires the approval of California voters in November 2012.
According to California’s Legislative Analyst’s Office, revenue estimates for the initiative vary widely – from $6.8 billion to $9 billion for 2012-13 and from $5.4 billion to $7.6 billion, on average, in each of the following five fiscal years, with lesser amounts in 2018-19. Additional revenues generated by this tax increase would be considered General Fund revenues for the purpose of calculating General Fund Proposition 98 obligations.
To achieve these revenues, personal income tax rates will be increased for seven years and the state’s sales and use tax rate will be increased for four years.
Specifically, the personal income tax portion of the proposal will add three new personal income tax brackets with rates above 9.3 percent. These new rates will be effective for seven years beginning January 1, 2012 through the end of the 2018 tax year for both single and joint taxpayers.
Under current law, the maximum marginal personal income tax rate is 9.3 percent. It applies to taxable income in excess of $48,209 for individuals; $65,376 for heads of household; and $96,058 for joint filers. For those filers with taxable incomes over $1 million, an additional 1 percent rate for mental health services applies, bringing their rate to 10.3 percent.
According to the Tax Foundation’s 2012 State Business Tax Climate Index, which gauges how states’ tax systems compare, California’s tax climate ranks near the bottom – 48 out of all 50 states, behind only New York and New Jersey. The Tax Foundation uses five different categories of taxes – Corporate Tax, Individual Income Tax, Sales Tax, Property Tax and Unemployment Insurance Tax – to evaluate and compare states’ relative tax climates.
Moreover, under the Tax Climate Index, California’s current personal income tax rates are already ranked as the worst in the nation. While California’s 9.3 percent tax rate is only the fifth highest in the nation behind Hawaii (10% for income over $175,000), Oregon (10.8% for income over $125,000), Rhode Island (9.9% for income over $372,950), and Vermont (9.4% for income over $372,950), it is ranked the worst in the nation because California’s rate applies to taxable incomes as low as $48,209 for individual filers.
The Governor’s tax proposal, would add three new tax brackets:
- A 10.3 percent tax rate on incomes between $250,000 and $300,000 for individuals; $340,000 and $408,000 for heads of household; and $500,000 and $600,000 for joint filers.
- An 11.3 percent tax rate on incomes between $300,000 and $500,000 for individuals; $408,000 and $680,000 for heads of household; and $600,000 and $1 million for joint filers.
- A 12.3 percent tax rate on incomes in excess of $500,000 for individuals; $680,000 for heads of household; and $1 million for joint filers.
These tax rates would affect roughly 1 percent of California’s personal income tax filers due to the high income threshold. Taxpayers with taxable incomes over $1 million would still pay the additional 1 percent mental health tax.
In addition, Governor Brown’s proposal increases the state’s sales and use tax rate by 0.25 percent, bringing the state’s base rate to 7.5 percent from 7.25 percent and make the state’s overall SUT to approximately 8.4%. This higher rate would remain in effect for four years, from January 1, 2013 through December 2016.
Next year, should Governor Brown’s tax proposal be implemented, California would undoubtedly challenge New York and New Jersey for having the worst tax climate in the nation.
Perhaps Winston Churchill said it best, “We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
Simply put, taxes are a poor substitute for doing the heavy lifting of re-thinking, reorganizing, and re-prioritizing government. No state better illustrates the failure of tax increases than the one time Golden State. However until the current Administration at both the federal and state levels of governance realize this, California families may wish to start preparing for the coming tax tsunami.
For more information on this report or other tax related issues, contact Scott Chavez, Senate Republican Office of Policy at 916/651-1501.
 Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances, the U.S. Federal Reserve Bulletin, June 2012 (accessed June 15, 2012)
 Joint Committee on Taxation, “Estimated Budget Effects of the ‘Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010’” December 10, 2012
 An Overview of Tax Provisions Expiring in 2012, Congressional Research Service, April 17, 2012 (accessed June 15, 2012)
 Adopted from “Taxmageddon: Massive Tax Increase Coming in 2013,” Issue Brief No. 3558, The Heritage Foundation, April 4, 2012.
 Estimates of Federal Tax Expenditures for Fiscal Years 2011-2015, report prepared for House Committee on Ways and Means and the Senate Committee on Finance by the Staff of the Joint Committee on Taxation, January 17, 2012 (accessed June 20, 2012).
 The Cost of Taxmageddon: Impact by State and Congressional District, The Heritage Foundation, Center for Data Analysis. June 14, 2012 (accessed June 15, 2012)
 Schools and Local Public Safety Protection Act of 2012- version 3, initiative 2012-009, filed March 16, 2012.
 Fiscal Analysis of the California Schools and Local Public Safety Protection Act of 2012- version 3, initiative 2012-009, Legislative Analyst’s Office, March 16, 2012.
 Proposition 63 (2004): The Mental Health Services Act imposed a 1% income tax on personal income in excess of $1 million.